What Investors Need To Know
On Thursday 7 January the UK Government announced a series of measures that could affect millions of apartment owners (in particular) but also impact on those who develop and invest in residential real estate in England.
So far, we can only examine the Government’s statement of intent in its press release. But certainly, in the short term there will be targeted reforms to the law of enfranchisement and to residential leasehold law. There will then be a commission/working group to consider how to properly introduce commonhold (or condominium/strata) in England.
Changes to residential leasehold
It sounds highly likely that legislation will be introduced this year to ban on residential ground rents on future residential leases. The Government has been threatening this for so long that the market has already started to shift and stop charging such rents on new properties. A change would be straight forward to introduce and would be popular. Government would just need to clearly distinguish between rents and service charges.
The retirement living industry had previously made the case for having clearly explained ground rents on their developments, largely to pay for the construction of lounges and other amenity areas. The tone of the press release is very different to previous supportive messages to this part of the homebuilding industry. There doesn’t seem to be any acknowledgment that ground rents are an alternative to event fees, and that being unable to charge ground rents could make retirement properties more expensive.
A ban had also been proposed for leasehold houses. There are sometimes justifications for selling homes with more than one storey, on a leasehold basis rather than freehold. In particular, a lot of developers have to create innovative house schemes over podium levels or underground car parks, because of site constraints. The legislation could acknowledge this though, perhaps by carefully defining what a house is.
There could be an impact on the use of building leases, which are often used by public bodies when releasing land for housing because they give some control over housing delivery. If a developer isn’t given the freehold by the public body, it cannot sell freehold houses.
Changes to commonhold
The Law Commission would like to see England and Wales move to a commonhold system, which is the position that most apartment owners are in in Scotland, and in the rest of the common law world.
They acknowledge that it would take a lot of time to firstly refine and reform commonhold, and secondly to encourage its take up. The views of mortgage lenders and insurers will be critical because at the moment problems with commonhold legislation mean that (statistically speaking) it has never been used in England. There are about 150 commonhold homes, total, in England and Wales, and commonhold has been used about 15 times since being introduced in 2002. It just isn’t currently a feature of the English property market, which is in stark contrast to how other countries arrange their apartment schemes.
There is obviously some degree of market failure in the apartment market, because of the sustained complaints from several leaseholders. Arguably though there isn’t a profound difference between a group of neighbours having a freeholder/landlord who has to maintain their building, and those neighbours all owning and maintaining the building themselves. Roofs will still leak, and people will still argue over how much it costs to sweep the parking spaces.
For bigger buildings Government will have to really think about the impact on housing associations, and on commercial leaseholders in mixed use schemes. There is a problem in other countries with under-resourced and poorly maintained condominium schemes. There have been significant problems in British Columbia, and in some Australian states, often requiring government intervention to deal with a sustained lack of investment in the upkeep of buildings. If you are a housing association or a commercial tenant with, in theory, deep pockets you may worry about being forced to make up for a failure by private apartment owners to pay for a building’s upkeep.
At present the sole driver for reform seems to be the problems faced by a number of flat owners and they are not the only parties with something at stake. Ultimately, the legislation will need to have quite strong powers for commonhold associations to enforce a failure to pay or comply with the rules, to avoid the problems seen elsewhere in the world.
Hopefully there will not be a large-scale compulsory exercise to change existing leasehold buildings to commonhold. If a large majority of leaseholders want to do this, then they should be able to choose to do so. Every building and every scheme is different though and it would be incredibly complicated to change all of the rights and obligations governing all leasehold buildings with a single piece of legislation. It could go wrong in a number of cases and that would harm the people involved. This should be something that developers choose to set up, as a value-add when the legislation is reformed, or something that groups of neighbours all choose to do.
If you change a leasehold property to commonhold, using legislation, you could state in the legislation that the mortgage for the leasehold home would automatically become a mortgage of the commonhold home, on the same terms. Parliament would have that power. At some point though a lender would need to be satisfied that the commonhold had been properly set up and that the secured property was marketable. You cannot use legislation to stop lenders weighing up the value and features of the property they are lending against. It is unlikely that mortgage lenders would want the legal status of millions of homes to change at once.
Ultimately, stakeholders should adapt to the changes in the near horizon, and actively contribute to the longer-term debate about how much we change how we live in shared buildings.
This article first appeared in CoStar.